Measuring tax gaps 2020 edition - GOV UK · 2020. 8. 5. · Measuring tax gaps 2020 edition HM...

Measuring tax gaps 2020 editionTax gap estimates for 2018 to 2019

An Official Statistics release 9 July 2020

HM Revenue and Customs 2Measuring tax gaps 2020 edition

Contents

3 Introduction

5 At a glance

6 1. Summary

27 2. VAT

36 3. Excise (including alcohol, tobacco and oils)

38 Alcohol

41 Tobacco

47 Oils

50 Other excise duties

55 4. Income Tax, National Insurance contributions and Capital Gains Tax

76 5. Corporation Tax

89 6. Other taxes

93 Glossary

95 Abbreviations

96 Index of tables and figures

Contacts

Anthony Burke [email protected] 03000 572 768

HMRC Press Office Individuals: 03000 585 020 Business: 03000 585 028 Out-of-hours: 07860 359 544


Introduction

4.7% The tax gap is estimated to be £31 billion, which is 4.7% of tax liabilitiesWhat is the tax gap?

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

Why do we measure it?

The tax gap provides a useful tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

• it provides a foundation for HMRC’s strategy — thinking about the tax gap helps us understand how non-compliance occurs and how we can address the causes and improve the overall health of the tax administration system

• our tax gap analysis provides insight into which strategies are most effective at reducing the tax gap

• although the tax gap isn’t sufficiently timely or precise enough to set annual targets or manage detailed operational performance, it provides important information which helps us understand our long-term performance

The tax gap also provides important information to the public on tax compliance, creating greater transparency in the tax system.

Why is there a tax gap?

The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap. It is impossible to collect every penny of tax that is owed — for example, we cannot collect outstanding tax from businesses that become insolvent.


How is it calculated?

The tax gap estimate has been produced by analysts working within HMRC, in line with the values, principles and protocols set out in the Code of Practice for Statistics. We use a range of internal and external data and different analytical techniques to produce annual estimates, which we revise as more accurate data becomes available.

These are our best estimates based on the information available, but there are many sources of uncertainty and potential error. For this reason, it is best to focus on the trend in the results rather than the absolute numbers when interpreting findings. However, where possible, errors are shown using error margins or upper and lower bounds.

Introduction


UK tax gap at a glance in 2018 to 2019

4.7%The tax gap is estimated to be £31 billion, which is 4.7% of tax liabilities

What is the tax gap?The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

Why measure it?Tax gap analysis helps us to understand the reasons for losses in the system.

How is it calculated?It’s an official statistic produced by government analysts in HMRC using a range of internal and external data and different analytical techniques.

The tax gap is difficult to measure and there are many sources of error. However, it gives an indication of our long-term performance — we have seen that the tax gap has decreased since the tax year 2005 to 2006.

Tax gap and percentage of liabilities: tax years 2005 to 2006 up to 2018 to 2019

3.0

4.0

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7.5%

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5.3%

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£31b

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6.3%

£31b

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£31b

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£31b

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£29b

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bn

6.7%

£34

bn

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£38b

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6.8%

£38b

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5.8%

£33b

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4.7%

£31b

n

Value of the tax gap: tax year 2018 to 2019

By customer group

£13.4bn Small businesses

£5.3bn Large businesses

£4.5bn Criminals

£3.7bn Mid-sized businesses

£2.4bn Individuals

£1.7bn Wealthy

By type of tax

£12.1bn IT, NICs and CGT1

£10.0bn Value Added Tax

£4.4bn Corporation Tax

£2.8bn Excise duties

£1.7bn Other taxes

By behaviour

£5.5bn Failure to take reasonable care

£4.9bn Legal interpretation

£4.6bn Evasion

£4.5bn Criminal attacks

£4.1bn Non-payment

£3.1bn Error

£2.6bn Hidden economy

£1.7bn Avoidance1 IT — Income Tax, NICs — National Insurance contributions, CGT — Capital Gains Tax

A full time series for tables is available on our website www.gov.uk/government/statistics/measuring-tax-gaps-tables

http://www.gov.uk/government/statistics/measuring-tax-gaps-tables


1. Summary

Key findings

Key findings for the tax year 2018 to 2019 are:

• the UK tax gap in 2018 to 2019 is estimated to be 4.7%1 of total theoretical tax liabilities, with an associated point estimate of £31 billion — this means in 2018 to 2019, HMRC secured 95.3% of all tax due

• there has been a long-term reduction in the overall tax gap, from 7.5% in the tax year 2005 to 2006 to 4.7% in 2018 to 2019

• the tax gap for Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICS and CGT) is 3.4% in 2018 to 2019 at £12.1 billion — this represents the biggest share of the total tax gap by type of tax

• there has been a long-term reduction for the Value Added Tax (VAT) gap from 14.0% in 2005 to 2006 to 7.0% in 2018 to 2019

• the excise duty gap has reduced from 8.4% in 2005 to 2006 to 5.0% in 2018 to 2019

• the Corporation Tax gap has reduced from 11.3% in 2005 to 2006 to 7.0% in 2018 to 2019

• the avoidance tax gap has reduced from £3.7 billion in 2005 to 2006 to £1.7 billion in 2018 to 2019

• the tax gap from the wealthy customer group has been presented separately for the first time and is £1.7 billion in 2018 to 2019

1 There may be small differences between the percentage tax gap figures in this chapter and those recorded in later chapters. The main reason for this is that the current chapter uses recorded receipts data to derive the tax gap estimates, whilst other chapters may use recorded liabilities data instead. This is because, in contrast to liabilities data, receipts figures are available for the detailed breakdowns required in Chapter 1.


What the tax gap estimates show since 2005: tax years 2005 to 2006 up to 2018 to 2019

Figure 1.1 shows the value of the tax gap alongside the percentage tax gap, which is calculated as a percentage of the amount of tax that should, in theory, be paid to HMRC. More detail is given in the ‘Tax gap measurement’ section on page 15.

3.0

4.0

1.0

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0%

Figure 1.1: Tax gap as a percentage of theoretical tax liabilities, 2005-06 to 2018-191

2005 -06

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£ tax gap Percentage of theoretical liabilities

2018 -19

7.5%

6.7%

6.3%6.7% 6.5% 6.2% 6.2%

6.7%7.2%

6.8%

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4.7%5.0%

£32b

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£31b

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1 Figures for previous years have been revised following methodological improvements and incorporating more up-to-date data.

There has been a reduction in the percentage tax gap over the past 14 years from 7.5% in 2005 to 2006 to 4.7% in 2018 to 2019. The fall in the overall tax gap between tax years 2013 to 2014 and 2018 to 2019 is mainly driven by the fall in the tax gaps for Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICs and CGT), and Value Added Tax (VAT). There has been a long-term reduction in tax gaps for both excise duties and Corporation Tax.

The percentage tax gap provides a better measure of compliance over time. It takes into account some of the effects of inflation, economic growth and changes to tax rates2, whereas the cash figure does not. For instance, in a growing economy where the tax base is increasing, even if the percentage tax gap remained level, the cash figure would grow.

2 A full list of rates is available on our website www.gov.uk/government/collections/rates-and-allowances-hm-revenue-and-customs

Summary

http://www.gov.uk/government/collections/rates-and-allowances-hm-revenue-and-customs


Tax gap by type of tax

Figure 1.2 shows how the tax gap is composed of different taxes. It shows that two components, one covering Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICs and CGT) and the other Value Added Tax (VAT), account for 71% of the tax gap.

Other taxes3

5%

Excise duties9%

Corporation Tax 14%

Value Added Tax 32%

IT, NICs and CGT2

39%

£1.7bn

£2.8bn

£4.4bn

£10.0bn

£12.1bn

Figure 1.2: Tax gap by type of tax — value and share of tax gap, 2018-191

1 Figures may not appear to sum due to rounding.2 ‘IT, NICs and CGT’ refers to Income Tax, National Insurance contributions and Capital Gains Tax.3 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy,

Insurance Premium Tax, Landfill Tax, Soft Drinks Industry Levy) and direct taxes (stamp duties, Inheritance Tax).

Summary


Figure 1.3 shows the total theoretical liability by type of tax, broken down by tax gap and tax paid (receipts). It shows that the tax gap for IT, NICs and CGT, while it is the biggest at £12.1 billion (see figure 1.2), equates to 3.4% of the total theoretical liabilities, and the VAT gap at £10.0 billion represents 7.0% of VAT theoretical liabilities.

IT, NICs and CGT

50

100

150

200

250

300

350

£0bn

Figure 1.3: Tax gap by type of tax — value and share of total theoretical liabilities, 2018-191,2

3.4%

Value Added Tax (VAT)

7.0%

Other taxes3

Corporation Tax

4.3%7.0%

Excise duties

5.0%

Receipts Tax gap

1 The percentage tax gaps are as a proportion of total theoretical liabilities.2 The percentage tax gap for tax types may differ between Chapter 1 and subsequent chapters. We use published

receipts figures in Chapter 1 as liability figures are not available at the level required across all tax heads. Read the published receipts figures used in Chapter 1 on GOV.UK: www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

3 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax, Soft Drinks Industry Levy) and direct taxes (stamp duties, Inheritance Tax).

Summary

http://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-ukhttp://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk


Figure 1.4 shows the trend in the tax gaps over time. The largest proportionate falls between tax years 2005 to 2006 and 2018 to 2019 are in the Corporation Tax gap, VAT and the excise duties tax gaps, while the tax gaps for the other taxes and IT, NICs and CGT have remained relatively constant.

Figure 1.4: Tax gap as percentage of total theoretical liabilities by type of tax1,2,3

2005 -06

2007 -08

2006 -07

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0%

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VAT IT, NICs and CGTExcise duties Other taxes4Corporation Tax

1 Figures for previous years have been revised.2 The percentage tax gap for tax types may differ between Chapter 1 and subsequent chapters. We use published

receipts figures in Chapter 1 as liability figures are not available at the disaggregated level required across all tax heads. Read the published receipts figures used in Chapter 1 on GOV.UK: www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

3 The petroleum tax gap is not calculated from 2015 to 2016 as Petroleum Revenue tax was permanently zero rated from 1 January 2016.

4 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax, Soft Drinks Industry Levy) and direct taxes (Stamp duties, Inheritance Tax, Petroleum Revenue Tax for years prior to 2015 to 2016).

At the end of the chapter:

Table 1.1 shows the composition of the tax gap estimates for 2018 to 2019.

Table 1.2 shows the percentage tax gap since 2005 to 2006 by type of tax.

Table 1.3 shows a time series of the tax gap (cash figure) by type of tax since 2005 to 2006.

Summary

http://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-ukhttp://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk


Tax gap by customer group

HMRC’s strategy for improving the health of the tax administration system and addressing the causes of the tax gap is to segment its customers into groups. This allows HMRC to identify customer needs and risks more accurately and tailor its responses — whether that’s by providing appropriate support to ensure customers get their tax right, or by taking targeted action to tackle avoidance, evasion and criminal activity.

Tax gaps measurements are aligned with this customer segmentation, so the insights gained can be applied directly to improving the way HMRC manages these customer groups:

• individuals• wealthy• small businesses• mid-sized businesses• large businesses• criminals

HMRC uses the tax gap to understand what drives non-compliance and provides a foundation for HMRC’s compliance strategy.

For more information on HMRC’s overall strategic approach go to www.gov.uk/government/publications/hmrc-strategy

For more information on how HMRC tackles both tax avoidance and tax evasion go to https://commonslibrary.parliament.uk/research-briefings/cbp-7948/

Summary

http://www.gov.uk/government/publications/hmrc-strategyhttps://commonslibrary.parliament.uk/research-briefings/cbp-7948/


Figure 1.5 shows the tax gaps by customer group for the tax year 2018 to 2019. The tax gap breakdown by customer group is primarily based on data — however, as some judgement and assumptions are involved, the estimates are subject to uncertainty which cannot accurately be quantified.

In 2018 to 2019, over 40% of the tax gap is attributed to small businesses, whereas wealthy customers account for the smallest share of the tax gap.

The tax gap from wealthy customers has been estimated for the first time in ‘Measuring tax gaps 2020 edition’. A wealthy customer is defined as an individual with an income greater than £200,000 or assets of greater than £2 million. The wealthy tax gap estimate is given in figure 1.5 below, and the customer group is discussed in more detail in Chapter 4.

Individuals8%

Mid-sized businesses12%

Criminals 14%

Large businesses 17%

Small businesses43%

£2.4bn

£3.7bn

£4.5bn

£5.3bn

£13.4bn

Figure 1.5: Tax gap by customer group — value and share of tax gap, 2018-19

Wealthy6%£1.7bn

Table 1.4 (at the end of the chapter) shows a time series of the tax gap by customer group, as a percentage of total theoretical liabilities. The breakdown of the tax gap by customer group over the past five years has been broadly stable.

Summary


Tax gap by behaviour

The tax gap is composed of a range of behaviours: non-payment, use of avoidance schemes, legal interpretation of the tax effects of complex transactions, error, failure to take reasonable care, evasion, the hidden economy and criminal attacks on the tax system.

Figure 1.6 shows an estimate of taxpayer behaviours attributed to the tax gap for the tax year 2018 to 2019. These estimates give a broad indication of behaviours and are calculated using assumptions and judgment.

‘Failure to take reasonable care’ and ‘Legal interpretation’ account for the largest proportions of the tax gap.

Non-payment13%

Criminal attacks14%

Evasion15%

Legal interpretation16%

Failure to take reasonable care 18%

£4.1bn

£4.5bn

£4.6bn

£4.9bn

£5.5bn

Figure 1.6: Tax gap by behaviour — value and share of tax gap, 2018-191

Error10%£3.1bn

Avoidance5%

Hidden economy9%

£1.7bn

£2.6bn

1 Figures may not appear to sum due to rounding.

Table 1.5 (at the end of the chapter) shows a time series of the tax gap by behaviour. As with the headline figures, the percentage figures provide a better measure of compliance over time because it takes into account changes to the tax base. It shows that customer behaviours over the past six years have been broadly consistent.

Summary


Avoidance

Avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter, but not the spirit, of the law.

The avoidance tax gap is estimated at £1.7 billion for the tax year 2018 to 2019. The avoidance tax gap estimates reflect the laws that were in place at the time and do not include any subsequent changes to the tax law to prevent further use of avoidance. The avoidance tax gap estimate for the Income Tax, National Insurance contributions and Capital Gains Tax component is being projected this year due to issues with data processing and we anticipate revisions in future years.

Figure 1.7 shows how the avoidance tax gap is split by type of tax in 2018 to 2019. Around half of the avoidance tax gap (£0.9bn) is attributed to Corporation Tax (CT), with £0.6bn attributed to Income Tax, National Insurance contributions and Capital Gains Tax (IT, NICs and CGT). Other direct taxes and VAT account for the smallest share of avoidance (each at £0.1bn).

Table 1.6 (at the end of the chapter) shows the breakdown of the avoidance tax gap by type of tax between tax years 2005 to 2006 and 2018 to 2019.

Other direct taxes1

£0.1bn

Figure 1.7: Avoidance tax gap by type of tax, 2018-19 (£ billion)

Corporation Tax£0.9bn

IT, NICs and CGT£0.6bn

VAT£0.1bn

1 ‘Other direct taxes’ includes stamp duties and Inheritance Tax.

The definition of avoidance used to produce the tax gap estimates is described in Table 1.7 (at the end of the chapter).

The methodologies used to produce the avoidance tax gap estimates differ according to the type of tax. They are summarised in the relevant chapters of this report and in the ‘Methodological annex’.

The ’Methodological annex’ is available on our website www.gov.uk/government/statistics/measuring-tax-gaps

Summary

http://www.gov.uk/government/statistics/measuring-tax-gaps


Tax gap measurement

Definition

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

The ‘theoretical tax liability’ represents the tax that would be paid if all individuals, businesses and companies complied with both the letter of the law and our interpretation of Parliament’s intention in setting law (referred to as the spirit of the law). The total theoretical tax liability is calculated as the tax gap plus the amount of tax actually received by HMRC receipts.

The tax gap estimates only cover the taxes administered by HMRC, so exclude taxes and duties administered elsewhere (Council Tax, business rates, and Vehicle Excise Duty) as well as charges, such as the congestion charge. These estimates also exclude error and fraud in tax credits which are published separately.

Tax gap measurement — the Error and Fraud in Tax Credits publication can be found under the Other Official Statistics section www.gov.uk/government/collections/personal-tax-credits-statistics

Tax gaps are calculated net of compliance yield — that is, they reflect the gap remaining after HMRC’s compliance work. More information on compliance yield is available in HMRC’s Annual Report and Accounts. The ‘Methodological annex’ sets out how compliance yield is reflected in estimations for each component of the tax gap. Information in HMRC’s Annual Report and Accounts and ‘Measuring tax gaps’ publication are not directly comparable. To read more information on how the methodology for measuring tax yield in HMRC’s Annual Report and Accounts differs from the methodology for how compliance yield is reflected in the tax gap estimates, go to https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627609/The_tax_gap_and_compliance_yield___what_they_are_and_how_they_relate.pdf

The Annual Report and Accounts is available on our website www.gov.uk/government/collections/hmrcs-annual-report-and-accounts


Summary

http://www.gov.uk/government/collections/personal-tax-credits-statisticshttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627609/The_tax_gap_and_compliance_yield___what_they_are_and_how_they_relate.pdfhttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627609/The_tax_gap_and_compliance_yield___what_they_are_and_how_they_relate.pdfhttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/627609/The_tax_gap_and_compliance_yield___what_they_are_and_how_they_relate.pdfhttp://www.gov.uk/government/statistics/measuring-tax-gaps


Measurement methods

There are numerous approaches to measuring tax gaps. VAT and excise tax gaps are predominantly estimated using a ‘top-down’ approach, by comparing the implied tax due from consumer expenditure data with tax receipts. Most other components are estimated using a ‘bottom-up’ approach, building up from our own operational data and management information. The way we estimate each tax gap component and the data we use is set out in the relevant chapters, with additional information in the ‘Methodological annex’.

Top-down estimates

Independent, external data on consumption is used to estimate the tax base.

This tax base is used to calculate a theoretical value of tax that should be paid.

The actual amount of tax paid is subtracted from this theoretical value to estimate the tax gap.

These estimates are combined to estimate the tax gap.

Different methods and data sources are used to estimate how much tax is lost within each area.

HMRC uses internal data and operational knowledge to identify areas of potential tax loss.

Bottom-up estimates

The ‘Methodological annex’ is available on our website www.gov.uk/government/statistics/measuring-tax-gaps

The total tax gap is comprised of established statistical methods and illustrative estimates. Figure 1.8 shows that 80% of the tax year 2018 to 2019 tax gap is estimated using established methods. Experimental methodologies are used to produce illustrative estimates where there is no direct measurement data. For these tax gap components, we use the best available data, simple models and assumptions to build an illustrative estimate of the tax gap.

Experimental20%

Established 80%

£6.1bn

£24.8bn

Figure 1.8: Tax gap by type of methodology, 2018-19 (£ billion)

Summary



Accuracy and uncertainty

Due to the methodologies used, all tax gap estimates are subject to error, are uncertain and can change from year to year due to improvements in method and data updates. Where possible, confidence intervals and ranges are set out for components of the tax gap in the relevant chapters.

The main sources of error are systematic errors in the assumptions used to calculate the estimates and sampling errors in the data used. Where possible, a robust estimate of the error margin is provided.

The methodologies used to calculate tax gaps are subject to regular review which could result in revisions to any of the published estimates. Estimates are made on a like-for-like basis each year to enable users to interpret trends, although some smaller tax gaps are not updated each year. Where data sources change over time, every effort has been made to ensure consistency in the series, but this is another potential source of uncertainty.


Assurance

Our tax gap estimates are official statistics produced with the highest levels of quality assurance and adhere to the framework for the Code of Practice for Statistics. This code assures objectivity and integrity — providing the framework to ensure that statistics are trustworthy, good quality, and are valuable and provides producers of official statistics with the detailed practices they must commit to when producing and releasing official statistics.

To view the UK Statistics Authority’s Code of Practice, go to www.statisticsauthority.gov.uk/code-of-practice/

The Office for Statistics Regulation (OSR), the regulatory arm of the UK Statistics Authority, provides independent regulation of all official statistics produced in the UK.

HMRC’s “preparation, production and publication of the ‘Measuring tax gap’ statistics” was commended by the OSR after it completed a compliance check in May 2019 on the extent to which HMRC’s ‘Measuring tax gaps’ statistics meet the standards of the Code of Practice for Statistics.

Regulators stated the HMRC tax gap team had proven to be “highly committed and engaged when working to enhance the trustworthiness, quality and value of these statistics” and also stated “HMRC is world-leading in measuring tax gaps and is setting the bar for others to follow”.

For more information on the OSR compliance check on the ‘Measuring tax gaps’ statistics go to www.statisticsauthority.gov.uk/correspondence/compliance- check-of-measuring-tax-gaps-statistics

Summary

http://www.gov.uk/government/statistics/measuring-tax-gapshttp://www.statisticsauthority.gov.uk/code-of-practice/http://www.statisticsauthority.gov.uk/correspondence/compliance-check-of-measuring-tax-gaps-statisticshttp://www.statisticsauthority.gov.uk/correspondence/compliance-check-of-measuring-tax-gaps-statistics


The International Monetary Fund (IMF) assessed the way in which the UK calculates its tax gap. The IMF report, published in October 2013, concluded that “HMRC’s tax gap analysis program is comprehensive in tax coverage, effectively addresses its multiple dimensions, and work is ongoing to enhance its support to HMRC management. Tax gaps are estimated for most parts of the taxes administered by HMRC. In this regard, HMRC produces one of the most comprehensive studies of tax gap estimates internationally. In general, the models and methodologies used by HMRC to estimate the tax gap across taxes are sound and consistent with the general approaches used by other countries.”

For more information on the IMF’s ‘Measuring tax gaps’ assessment go to www.imf.org/external/pubs/ft/scr/2013/cr13314.pdf

HMRC continues to engage with academics, international institutions and other fiscal authorities, as well as the UK’s National Audit Office, the Office for Statistics Regulation and the Office for National Statistics, to share methodologies and best practices to estimate the tax gap as accurately as possible.

HMRC is an active member of international bodies which aim to improve and share best practice in estimating tax gaps, including:

• the Organisation for Economic Co-operation and Development (OECD), who established the Advanced Tax Gap Analysis Community of Practice in March 2019, for OECD member countries that have significant experience in tax gap estimation

• the OECD working group on measurement of the shadow economy

• the International Monetary Fund’s (IMF’s) group to develop best practice guidance for a personal income tax gap methodology

‘Measuring tax gaps’ tables

A full set of the ‘Measuring tax gaps’ tables and tax gap time series is published on our website. These have been revised and updated for methodological revisions detailed in this publication up to and including 2018 to 2019.

Historical data sets are available via ‘Measuring tax gaps’ tables at www.statisticsauthority.gov.uk/correspondence/compliance-check-of-measuring-tax-gaps-statistics

Research using tax gap data

In May 2011, the HMRC Datalab was launched to allow approved researchers access to de-identified taxpayer and customs data, for research and analysis purposes that benefit HMRC’s functions. By making the taxpayer-level data available in a safe (and secure) way, the Datalab supports knowledge sharing and policy making, facilitating new areas of research using improved methodologies whose findings should benefit society.

Researchers can submit a proposal requesting the use of other datasets if the information needed is currently not available in the Datalab.

For more information about HMRC Datalab, go to www.gov.uk/government/organisations/hm-revenue-customs/about/research

Summary

http://www.imf.org/external/pubs/ft/scr/2013/cr13314.pdfhttp://www.statisticsauthority.gov.uk/correspondence/compliance-check-of-measuring-tax-gaps-statisticshttp://www.statisticsauthority.gov.uk/correspondence/compliance-check-of-measuring-tax-gaps-statisticshttp://www.gov.uk/government/organisations/hm-revenue-customs/about/research


Revisions to tax gap estimates

Many tax gap component estimates have been revised since ‘Measuring tax gaps 2019 edition’. This is due to improvements in the way they are calculated, the availability of more up-to-date data and projections based on more recent years’ information. In July 2015, the National Audit Office endorsed HMRC’s good practice in adjusting previous figures where necessary and being transparent about the revisions.

Table 1.8 (at the end of the chapter) summarises the amount of revisions for each component of the tax gap.

Table 1.9 (at the end of the chapter) summarises the reasons. Further information is available within the relevant chapters.

Figure 1.9 shows the revisions made to the overall tax gap estimates for editions published since ‘Measuring tax gaps 2010 edition’. This illustrates the uncertainty around the estimation of tax gaps and highlights why they are best used as a long-term indicator of compliance.

Figure 1.9: Revisions to the tax gap as a percentage of liabilities compared to previous editions1

2005 -06

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2012 -13

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0%

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8

10

2

4

2018 -19

MTG 2011MTG 2010

MTG 2013MTG 2012

MTG 2014

MTG 2015

MTG 2016MTG 2017

MTG 2018MTG 2019

MTG 2020

1 MTG stands for ‘Measuring tax gaps’.

Summary


Tax gap: detailed breakdownsTable 1.1: Tax gap components

Tax Type Component 2018-19

Percentage tax gap1,2

Point estimate (£ billion)3

Value Added Tax Total VAT 7.0% 10.0

Excise duties4

Tobacco duties

Cigarette duty 8.5% 0.7

Hand-rolling tobacco duty 34.9% 0.8

Total tobacco duties 14.0% 1.5

Alcohol duties

Spirits duty 0.4% 0.0

Beer duty 13.9% 0.6

Total alcohol duties 7.5% 0.6

Hydrocarbon oils duties Hydrocarbon oils duties 0.5% 0.1

Other excise duties Other excise duties5 6.3% 0.5

Total excise duties 5.0% 2.8

Income Tax, National Insurance contributions, Capital Gains Tax

Self Assessment

Non-business taxpayers 10.5% 1.3

Business taxpayers 22.9% 4.1

Large partnerships 5.4% 1.1

Total Self Assessment 12.9% 6.5

PAYE

Small business employers 1.1% 0.9

Mid-sized business employers 0.8% 0.5

Large business employers 1.1% 1.6

Total PAYE 1.0% 3.0

Avoidance Total avoidance (IT, NICs and CGT) n/a 0.6

Hidden economy

Ghosts6 n/a 1.0

Moonlighters7 n/a 0.9

Total hidden economy (IT, NICs and CGT) n/a 1.9

Total income tax, National Insurance Contributions and Capital Gains Tax 3.4% 12.1

Corporation Tax

Small businesses 14.4% 2.6

Mid-sized businesses 6.8% 0.8

Large businesses 2.9% 0.9

Total Corporation Tax 7.0% 4.4

Other taxes8 Stamp duties

Stamp Duty Land Tax 1.4% 0.2

Stamp Duty Reserve Tax 1.0% 0.0

Total stamp duties 1.3% 0.2

Other direct taxes Inheritance Tax 8.6% 0.5

Other indirect taxes Other indirect taxes 4.2% 0.7

Landfill Tax 28.4% 0.3

Total other indirect taxes 5.5% 1.0

Total other taxes 4.3% 1.7

Total tax gap9 4.7% 31

Illustrative indicators for gaps with no direct measure

1 The percentage tax gap is the tax gap pound value as a proportion of theoretical liability, where theoretical liability is defined as the tax gap plus the amount of tax actually received. Estimates are rounded to the nearest 0.1%.

2 The percentage tax gap for tax types may differ between Chapter 1 and subsequent chapters. We use published receipts figures in Chapter 1 as liability figures are not available at the level required across all tax heads. Read the published receipts figures used in Chapter 1 on GOV.UK: www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

3 The overall tax gap is rounded to the nearest £1 billion. Other estimates are rounded to the nearest £100 million.4 All excise tax gap point estimates and percentage tax gaps include duty only.5 ‘Other excise duties’ includes betting and gaming duties, cider and perry duties, spirit-based ready-to-drink duties and wine duties.6 Ghosts are individuals whose entire income is unknown to HMRC.7 Moonlighters are individuals who are known to us in relation to part of their income but have other sources of income that HMRC does not know about.8 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax,

Soft Drinks Industry Levy) and direct taxes (stamp duties and Inheritance Tax).9 We will be looking to incorporate emerging data sources as a result of offshore disclosure facilities and related work.

Summary

http://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk


Table 1.2: Percentage tax gap by type of tax1

Tax Type Percentage tax gap2,3

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Value Added Tax Total VAT 14.0% 11.9% 10.4% 8.6% 8.9% 8.6% 7.0%

Excise duties

Tobacco duties 21.7% 16.5% 12.8% 16.4% 17.8% 13.7% 14.0%

Alcohol duties4 9.8% 11.1% 14.7% 10.1% 9.4% 8.1% 7.5%

Hydrocarbon oils duties 2.8% 0.1% 0.1% 0.1% 0.5% 0.5% 0.5%

Other excise duties5 6.3% 10.0% 12.1% 8.8% 8.4% 6.7% 6.3%

Total excise duties 8.4% 6.5% 6.4% 6.1% 6.3% 5.0% 5.0%

Income Tax, National Insurance contributions and Capital Gains Tax

Self Assessment 16.7% 24.7% 22.9% 16.2% 12.6% 13.0% 12.9%

PAYE 1.5% 1.7% 1.3% 1.3% 1.1% 0.9% 1.0%

Avoidance6 n/a n/a n/a n/a n/a n/a n/a

Hidden economy6 n/a n/a n/a n/a n/a n/a n/a

Total personal income taxes

4.5% 5.6% 5.3% 4.1% 3.5% 3.3% 3.4%

Corporation Tax

Small businesses 19.1% 13.0% 14.9% 14.7% 13.6% 13.6% 14.4%

Mid-sized businesses 13.5% 9.7% 12.1% 9.2% 6.6% 6.4% 6.8%

Large businesses 8.8% 4.0% 4.3% 4.6% 3.2% 3.2% 2.9%

Total Corporation Tax 11.3% 7.8% 9.1% 8.8% 7.0% 6.8% 7.0%

Other taxes7

Stamp duties 2.5% 1.3% 1.4% 1.2% 1.1% 1.0% 1.3%

Other direct taxes8 3.1% 8.6% 8.4% 7.8% 7.7% 8.6% 8.6%

Other indirect taxes 7.5% 6.1% 6.1% 6.3% 6.6% 4.7% 5.5%

Total other taxes 4.3% 4.5% 4.3% 4.3% 4.4% 3.7% 4.3%

Total tax gap 7.5% 7.2% 6.8% 5.8% 5.3% 5.0% 4.7%

1 Figures for previous years have been revised.2 Estimates are rounded to nearest 0.1%.3 The percentage tax gap for tax types may differ between Chapter 1 and subsequent chapters. We use published receipts figures in Chapter 1 as liability

figures are not available at the level required across all tax heads. Read the published receipts figures used in Chapter 1 on GOV.UK: www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk

4 The total alcohol duties figure excludes wine, as wine is now included in ‘Other excise duties’ in this edition. We explain this further in Chapter 3.5 ‘Other excise duties’ includes betting and gaming duties, cider and perry duties, spirit-based ready-to-drink duties and wine duties.6 Percentage tax gap estimates for avoidance and the hidden economy are not shown as tax receipts cannot be calculated. 7 The petroleum tax gap is not calculated from tax year 2015 to 2016 as Petroleum Revenue Tax was permanently zero-rated from 1 January 2016.8 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax,

Soft Drinks Industry Levy) and direct taxes (Stamp duties, Inheritance Tax and Petroleum Revenue Tax for years prior to 2015 to 2016).

Summary

http://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk


Table 1.3: Tax gap (cash figure) by type of tax1

Tax Type Point estimates (£ billion)3

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Value Added Tax Total VAT 11.9 14.1 12.9 10.9 11.7 11.8 10.0

Excise duties

Tobacco duties 2.2 1.9 1.4 1.9 1.9 1.4 1.53

Alcohol duties 0.6 0.8 1.1 0.7 0.7 0.6 0.6

Hydrocarbon oils duties 0.7 0.0 0.0 0.0 0.1 0.1 0.1

Other excise duties4 0.3 0.7 0.9 0.7 0.7 0.5 0.5

Total excise duties 3.7 3.4 3.4 3.3 3.4 2.7 2.8


Self Assessment 4.6 9.1 9.4 6.6 5.9 5.9 6.5

PAYE 3.0 4.1 3.4 3.3 2.9 2.6 3.0

Avoidance 1.5 1.3 1.1 0.8 0.4 0.6 0.6

Hidden economy 1.4 1.6 1.7 1.7 1.8 1.8 1.9

Total personal income taxes 10.5 16.1 15.6 12.5 11.1 11.1 12.1

Corporation Tax

Small businesses 1.7 1.8 2.1 2.4 2.3 2.4 2.6

Mid-sized businesses 0.8 0.8 1.2 1.0 0.7 0.8 0.8

Large businesses 2.9 0.9 1.0 1.1 0.9 1.0 0.9

Total Corporation Tax 5.4 3.5 4.4 4.5 3.9 4.2 4.4

Other taxes5

Stamp duties 0.3 0.2 0.2 0.2 0.2 0.2 0.2

Other direct taxes6 0.2 0.4 0.4 0.4 0.4 0.5 0.5

Other indirect taxes 0.6 0.7 0.8 0.8 1.0 0.8 1.0

Total other taxes 1.0 1.3 1.3 1.4 1.6 1.4 1.7

Total tax gap 32 38 38 33 32 31 31

Total theoretical tax liabilities 435 531 551 565 600 623 651

Total percentage tax gap (%) 7.5% 7.2% 6.8% 5.8% 5.3% 5.0% 4.7%

Estimates for these years are projections and will be revised when operational data becomes available.

1 Figures for previous years have been revised.2 Figures are rounded to the nearest £100 million. Figures may not appear to sum due to rounding.3 Estimates for tobacco in tax year 2018 to 2019 are projections and will be revised when operational data becomes available. 4 ‘Other excise duties’ includes betting and gaming duties, cider and perry duties, spirit-based ready-to-drink beverage duties and wine duties. 5 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Climate Change Levy, Customs Duty, Insurance Premium Tax, Landfill Tax,

Soft Drinks Industry Levy) and direct taxes (stamp duties, Inheritance Tax, Petroleum Revenue Tax for years prior to 2015 to 2016).6 The petroleum tax gap is not calculated from tax year 2015 to 2016 as Petroleum Revenue Tax was permanently zero-rated from 1 January 2016.


Summary


Table 1.4: Tax gap time series by customer group, percentage of total theoretical liabilities1

Customer group

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

% £bn % £bn % £bn % £bn % £bn % £bn % £bn

Small businesses 2.4% 10.7 2.9% 15.1 2.7% 15.1 2.3% 13.2 2.1% 12.5 2.1% 13.1 2.1% 13.4

Large businesses 1.8% 7.6 1.2% 6.4 1.2% 6.4 1.0% 5.7 1.0% 5.9 0.9% 5.8 0.8% 5.3

Criminals 1.7% 7.5 1.2% 6.6 1.1% 5.9 0.9% 5.3 1.0% 5.9 0.7% 4.6 0.7% 4.5

Mid-sized businesses 0.8% 3.7 0.9% 4.9 0.8% 4.7 0.7% 4.0 0.7% 4.0 0.6% 4.0 0.6% 3.7

Individuals 0.5% 2.1 0.6% 3.1 0.6% 3.2 0.5% 2.7 0.3% 2.1 0.3% 2.0 0.4% 2.4

Wealthy 0.2% 1.0 0.4% 2.4 0.4% 2.3 0.3% 1.7 0.2% 1.3 0.3% 1.6 0.3% 1.7

Total2 7.5% 32 7.2% 38 6.8% 38 5.8% 33 5.3% 32 5.0% 31 4.7% 31

1 Figures for previous years have been revised.2 The overall tax gap is rounded to the nearest £1 billion. Other estimates are rounded to the nearest £100 million or the nearest 0.1%. Figures may not

appear to sum due to rounding.

Table 1.5: Tax gap time series by behaviour, percentage of total theoretical liabilities and £ billion1

Behaviour

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

% £bn % £bn % £bn % £bn % £bn % £bn % £bn

Failure to take reasonable care

1.0% 4.5 1.3% 7.0 1.4% 7.6 1.1% 6.5 0.9% 5.2 0.8% 5.1 0.8% 5.5

Legal interpretation 1.2% 5.3 1.2% 6.1 1.1% 6.3 1.0% 5.5 0.9% 5.4 0.9% 5.4 0.8% 4.9

Evasion 1.0% 4.3 1.1% 5.8 1.0% 5.7 0.8% 4.6 0.8% 4.5 0.7% 4.6 0.7% 4.6

Criminal attacks 1.7% 7.5 1.2% 6.6 1.1% 5.9 0.9% 5.3 1.0% 5.9 0.7% 4.6 0.7% 4.5

Non-payment 0.5% 2.2 0.8% 4.1 0.7% 3.6 0.5% 3.1 0.6% 3.3 0.6% 3.8 0.6% 4.1

Error 0.7% 3.1 0.7% 3.8 0.7% 3.8 0.6% 3.3 0.5% 3.2 0.5% 3.2 0.5% 3.1

Hidden economy 0.4% 1.9 0.5% 2.8 0.5% 2.7 0.5% 2.6 0.5% 2.7 0.4% 2.7 0.4% 2.6

Avoidance 0.9% 3.7 0.4% 2.3 0.4% 2.0 0.3% 1.7 0.2% 1.4 0.3% 1.7 0.3% 1.7

Total2 7.5% 32 7.2% 38 6.8% 38 5.8% 33 5.3% 32 5.0% 31 4.7% 31

1 Figures for previous years have been revised.2 The overall tax gap is rounded to the nearest £1 billion. Other estimates are rounded to the nearest £100 million or the nearest 0.1%. Figures may not

appear to sum due to rounding.

Table 1.6: Avoidance tax gap by type of tax (£ billion)1,2

Type of tax 2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Corporation Tax 1.6 0.7 0.7 0.7 0.8 0.9 0.9


1.5 1.3 1.1 0.8 0.4 0.6 0.6

Value Added Tax 0.5 0.2 0.1 0.1 0.1 0.1 0.1

Other taxes3,4 0.2 0.1 0.1 0.1 0.1 0.1 0.1

Total 3.7 2.3 2.0 1.7 1.4 1.7 1.7

1 Figures for previous years have been revised.2 Tax gap estimates for 2018 to 2019 are projected based on the data held at ‘Measuring tax gaps 2019 edition’.3 The petroleum tax gap is not calculated from 2015 to 2016 as Petroleum Revenue tax was permanently zero rated from 1 January 2016.4 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Customs Duty, Climate Change Levy, Insurance Premium Tax, Landfill Tax,

Soft Drinks Industry Levy) and direct taxes (Stamp duties, Inheritance Tax, Petroleum Revenue Tax for years prior to 2015 to 2016).

Summary


Table 1.7: Description of behaviours

Behaviours Description

Criminal attacks Organised criminal groups undertake co-ordinated and systematic attacks on the tax system. This includes smuggling goods such as alcohol or tobacco, VAT repayment fraud and VAT Missing Trader Intra-Community (MTIC) fraud.

Evasion Tax evasion is an illegal activity, where registered individuals or businesses deliberately omit, conceal or misrepresent information in order to reduce their tax liabilities.

Hidden economy Undeclared economic activity that involves what we call ‘ghosts’ — whose entire income is unknown to HMRC, and ‘moonlighters’ — who are known to us in relation to part of their income but have other sources of income that HMRC does not know about. There is a difference between the hidden economy and tax evasion:

• hidden economy — where an entire source of income is not declared

• tax evasion — where a declared source of income is deliberately understated

Avoidance Avoidance is exploiting the tax rules to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no commercial purpose other than to produce a tax advantage. It involves operating within the letter but not the spirit of the law.

Some forms of base erosion and profit shifting (BEPS) are included in the tax gap where they represent tax loss that we can address under UK law.

As new measures introduced in accordance with recommendations made in the BEPS project by the G20 group of world-leading economic nations and the Organisation for Economic Co-operation and Development (OECD) take effect, our ability to address BEPS under our domestic law will be greatly strengthened.

The tax gap does not include BEPS arrangements that cannot be addressed under UK law and that will be tackled multilaterally through the OECD. The OECD defines BEPS as ‘tax planning strategies that exploit gaps and mismatches in tax rules to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid’.

Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all forms of tax planning.

Legal interpretation Legal interpretation losses arise where the customer’s and HMRC’s interpretation of the law and how it applies to the facts in a particular case result in a different tax outcome, and there is no avoidance. Specifically, this includes the interpretation of legislation, case-law, or guidelines relating to the application of legislation or case-law.

Examples include categorisation such as an asset for allowances or VAT liability of a supply, the accounting treatment of a transaction, or the methodology used to calculate the amount of tax due as in transfer pricing, or VAT partial exemption.

Non-payment For direct taxes, non-payment refers to tax debts that are written off by HMRC and result in a permanent loss of tax — mainly as a result of insolvency. It does not include debts that are eventually paid.

VAT non-payment differs as it is based on the difference between new debts arising and debt payments (see Chapter 2).

Failure to take reasonable care

Failure to take reasonable care results from a customer’s carelessness and/or negligence in adequately recording their transactions and/or in preparing their tax returns. Judgments of ‘reasonable care’ should consider and reflect a customer’s knowledge, abilities and circumstances.

Error Errors result from mistakes made in preparing tax calculations, completing returns or in supplying other relevant information, despite the customer taking reasonable care.

Summary

More information and frequently asked question on the OECD’s Inclusive Framework on BEPS can be found at www.oecd.org/ctp/beps-frequentlyaskedquestions.htm

http://www.oecd.org/ctp/beps-frequentlyaskedquestions.htm


Table 1.8: Revisions to estimates since ‘Measuring tax gaps 2019 edition’

Tax Type Component Point estimates (£ billion)1,2,3

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18

Value Added Tax Total VAT 1.7 3.4 2.6 1.7 0.5 -0.8

Excise duties

Tobacco duties

Cigarette duty — — — — neg -0.1

Hand-rolling tobacco duty neg — — — neg neg

Total tobacco duties neg — — — neg -0.1

Alcohol duties

Spirits duty — — — — — neg

Beer duty — — — — — —

Total alcohol duties4 — — — — — neg

Hydrocarbon oils duties Hydrocarbon oils duties — — — — — —

Other excise duties Other excise duties4 — neg neg neg neg neg

Total excise duties neg neg neg neg neg neg

Income Tax, National Insurance contributions, Capital Gains Tax

Self Assessment

Non-business taxpayers 0.2 0.2 0.5 0.1 -1.2 -1.2

Business taxpayers neg 0.7 0.5 0.1 0.5 neg

Large partnerships neg 0.1 0.2 -0.1 -0.1 -0.3

Total Self Assessment 0.2 1.0 1.3 0.1 -0.8 -1.5

PAYE

Small business employers — neg 0.2 0.6 neg neg

Mid-sized business employers -0.1 neg -0.1 -0.2 -0.1 -0.2

Large business employers — — — -0.1 -0.1 -0.2

Total PAYE -0.1 neg neg 0.3 -0.2 -0.3

AvoidanceTotal avoidance (IT, NICs and CGT)

— — — — — —

Hidden Economy

Ghosts — — — — neg neg

Moonlighters neg neg — neg neg neg

Total hidden economy (IT, NICs and CGT)

neg neg — neg neg neg

Total IT, NICs and CGT 0.1 1.0 1.3 0.4 -1.0 -1.8

Corporation Tax

Small businesses -0.3 -0.1 -0.2 0.4 -0.1 -0.2

Mid-sized business -0.1 -0.1 0.1 neg -0.4 -0.5

Large businesses -0.3 -0.1 neg neg -0.3 -0.4

Total Corporation Tax -0.7 -0.3 -0.1 0.4 -0.9 -1.1

Other taxes5,6

Stamp dutiesStamp Duty Land Tax — — — — — —

Stamp Duty Reserve Tax — — — — — —

Total stamp duties — — — — — —

Other direct taxes Inheritance Tax neg neg -0.1 -0.2 -0.2 -0.2

Other indirect taxes

Landfill Tax — — — — — —

Other indirect taxes — neg neg 0.1 neg neg

Total other indirect taxes — neg neg 0.1 neg neg

Total other taxes neg neg -0.2 -0.1 -0.2 -0.1

Total tax gap 1.1 4.1 3.7 2.4 -1.5 -3.8

1 neg denotes revisions less than £50 million.2 ‘—’ denotes no change.3 Revisions may not appear to sum due to rounding.4 ‘Other excise duties’ includes betting and gaming duties, cider and perry duties, spirit-based ready-to-drink duties and wine duties.5 The petroleum tax gap is not calculated from 2015 to 2016 as Petroleum Revenue tax was permanently zero rated from 1 January 2016.6 ‘Other taxes’ includes indirect taxes (Aggregates Levy, Air Passenger Duty, Climate Change Levy, Customs Duty, Insurance Premium Tax, Landfill Tax and

Soft Drinks Industry Levy) and direct taxes (stamp duties, Inheritance Tax and Petroleum Petroleum Revenue Tax for years prior to 2015 to 2016).


Summary

http://www.gov.uk/government/statistics/measuring-tax-gaps-tables


Table 1.9: Description of revisions since last edition

Tax gap component Revisions

Value Added Tax Revisions have been made to the VAT gap estimates since last year’s publication ‘Measuring tax gaps 2019 edition’. This resulted in an upward revision in the level of the VAT gap for all years of around 1.9% or £2.1 billion on average, see Figure 2.3. These revisions were a result of incorporating new and updated data from the Office for National Statistics (ONS) and a number of changes to HMRC methodology, mainly to ensure the correct treatment of the data in the estimates. For more detail, see the ‘Revisions’ section in Chapter 2.

Excise duties

Spirits A small revision was made to the tax year 2017 to 2018 to account for an error in how we apply cross border shopping to our tax gap calculation.

Tobacco Revisions were made to the cigarettes and hand-rolling tobacco tax gaps for 2017 to 2018. The estimates now include previously missing data, the correction of a mistaken formula, and a correction to a forestalling adjustment made to clearances.

Other excise duties Revisions have been made across the historical time series to take a weighted average of the relevant tax gaps instead of a simple average.

Income Tax, National Insurance contributions, Capitals Gains Tax

Self Assessment (SA) There have been revisions to the historical time series to reflect three methodological changes:

1 projecting forward the tax gap by setting the gross tax gap percentage (the figure before adjusting for compliance yield and non-payment) to the same value as for the last year that used actual data

2 the inclusion of new operational audit data to ensure total coverage of the SA population

3 removal of forestalling for tax policy changes in the SA liability figures

The following have also led to revisions since last year’s publication:

1 the tax gap estimates for SA business and SA non-business for 2016 to 2017 have been revised to be based on actual data rather than being projected

2 the SA tax gap estimates for 2017 to 2018 and 2018 to 2019 have been revised to be projected from updated 2016 to 2017 data

3 settlement of long-running cases for which we previously had to forecast the outcome

PAYE small businesses There have been revisions to the historical time series following this methodological change:

1 removing PAYE mid-size businesses from the random enquiry sample to directly estimate the small business tax gap from 2015 to 2016 onwards

The following have also led to revisions since last year’s publication:

1 settlement of long-running cases for which we previously had to forecast the outcome

2 improvements to the method of distributing liabilities between different customer groups

PAYE mid-size businesses There have been some revisions to the historical time series following the use of new methodology.

PAYE large employers There have been some small revisions due to the use of updated figures for declared liabilities.

Avoidance There have been no revisions to the historical time series. Due to a data processing error we have retained the trends found in the data at ‘Measuring Tax Gaps 2019 edition’.

Corporation Tax (CT)

Small businesses There have been revisions to the historical time series following this methodological change:

1 removing CT mid-size businesses from the random enquiry sample to directly estimate the small business tax gap from 2016 to 2017 onwards.

In addition, the following have also led to revisions since last year’s publication:

1 updated figures for declared liabilities has caused minor revisions to the whole time series

2 the settlement of long-running cases for which we previously had to forecast the outcome

3 improvements in the distribution of CT liabilities between different customer groups

Mid-sized businesses There have been some revisions to the historical time series following the use of new methodology.

Large businesses There have been some revisions to the historical time series following the use of new methodology.

Other direct and indirect taxes

Inheritance Tax There have been some revisions to the historical time series following the use of new methodology.

Other indirect taxes The estimates for other indirect taxes have been revised in previous years to take a weighted average of the relevant tax gaps.

Summary


2. VAT

Other taxes5%

Corporation Tax14%

IT, NICs and CGT1

39%

Excise duties9%

Value Added Tax32%£10.0bn

Tax gap by type of tax — value and share of tax gap, 2018 to 2019

£12.1bn

£2.8bn

£4.4bn

£1.7bn

1 IT, NICs and CGT refer to Income Tax, National Insurance contributions and Capital Gains Tax.

Key findings

The Value Added Tax (VAT) gap is estimated to be £10.0 billion in tax year 2018 to 2019. This equates to 7.0% of net VAT total theoretical liability.

The VAT gap shows a downward trend between tax years 2005 to 2006 and 2018 to 2019, going from 14.0% to 7.0%.

The VAT gap has fallen from 8.6% in tax year 2017 to 2018 to 7.0% in 2018 to 2019. This can be explained by strong growth in VAT receipts (5.4%) outstripping growth in the net VAT total theoretical liability (3.6%).

VAT debt is estimated to have been fairly stable between tax years 2011 to 2012 and 2016 to 2017 at £1.5 billion on average, after which it started to rise to £2.2 billion in 2017 to 2018. However, this appears to have stabilised at £2.2 billion in 2018 to 2019.

Around 70% of the VAT total theoretical liability in 2018 to 2019 continues to be from household consumption. The remainder is from consumption by businesses that supply goods and services that are exempt from VAT and therefore cannot pass the VAT on, and from the government and housing sectors.

Slightly over half of the VAT from household expenditure continues to be from recreation and culture, restaurants and hotels and transport (see Figure 2.2).


The VAT gap estimates are often revised because of both new and updated data, as well as methodological improvements. In this publication, new and updated data were available from the Office for National Statistics (ONS) ‘National Accounts: Blue Book 2019’ and ‘Consumer Trends’ up to and including 2019 quarter four. The methodological improvements for this publication have included updating the estimates for expenditure on smuggled tobacco to better reflect the tax revenue lost by HMRC from goods entering the market through illegal channels, and updating the deduction to the gross VAT total theoretical liability to account for expenditure on goods from exempt small traders.

Overall, these updates have resulted in upward revisions to the VAT gap of 1.9 percentage points or £2.1 billion on average per annum, going back to 2005 to 2006. However, the impact of these changes varies over time with higher increases recorded between tax years 2009 to 2010 and 2013 to 2014 than in the rest of the years, whereas 2017 to 2018 has seen a downward revision.

Results and tables

Table 2.1 shows the estimated net VAT total theoretical liability (VTTL) — the VAT that should be paid and the actual net VAT receipts and the resulting estimated VAT gap for tax years 2005 to 2006, to 2018 to 2019.

The VAT gap shows a downward trend from 2005 to 2006 to 2018 to 2019, falling from 14.0% in 2005 to 2006 to 7.0% in 2018 to 2019. Over this period, the standard rate of VAT fluctuated between 15% and 20%. The VAT gap expressed as a percentage of VTTL provides a like-for-like comparison and takes account of the impact of any rate change.

The VAT gap decreased between tax years 2017 to 2018 and 2018 to 2019 from 8.6% to 7.0%. Further details can be found in the section ‘Sensitivity of the VAT gap’ on page 34.

Table 2.1: Estimated VAT gap (£ billion)1,2

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Net VTTL 84.8 118.9 124.4 126.3 131.4 137.1 142.1

Net VAT receipts3 72.9 104.8 111.4 115.4 119.8 125.4 132.1

VAT gap (point estimate)

11.9 14.1 12.9 10.9 11.7 11.8 10.0

of which debt n/a4 1.2 1.5 1.6 1.5 2.2 2.2

VAT gap %5 14.0% 11.9% 10.4% 8.6% 8.9% 8.6% 7.0%

1 The amounts are rounded to the nearest £0.1 billion.2 Figures for previous years have been revised.3 Net VAT receipts are expressed net of payments and repayments.4 ‘n/a’ denotes not available; due to data issues, the debt contribution can only be measured from tax year 2007

to 2008 onwards.5 The VAT gap as a percentage of VTTL has been rounded to the nearest 0.1%.

A full time series for tables is available on our website www.gov.uk/government/collections/measuring-tax-gaps

VAT

http://www.gov.uk/government/collections/measuring-tax-gaps


Figure 2.1 shows a time series of the VAT gap over the period 2005 to 2006 to 2018 to 2019. The VAT gap, excluding debt, remained broadly stable from tax years 2009 to 2010 to 2012 to 2013. The 2013 to 2014 figure is around 11% and The 2014 to 2015 figure is around 9% of VTTL, before falling to below 6% in 2018 to 2019. Due to data availability issues, the debt contribution can only be measured from tax year 2007 to 2008 onwards.

Figure 2.1: Time series of the VAT gap, including and excluding debt1

2005 -06

2007 -08

2006 -07

2009 -10

2010 -11

2012 -13

2011 -12

2008 -09

2013 -14

2016 -17

2017 -18

2014 -15

2015 -16

0%

2

4

6

8

10

12

14

16

2018 -19

Including debt Excluding debt

1 Figures for previous years have been revised.

VAT debt

The contribution of debt to the VAT gap is defined as the amount of VAT declared by businesses but not paid to HMRC (see ‘Methodology and data issues’ section for the definition of VAT debt). The VAT gap showed a peak at 14.7% in tax year 2008 to 2009, which was partly because the recession caused an increase in VAT debt from £0.8 billion in tax year 2007 to 2008 to £2.4 billion in 2008 to 2009. VAT debt has been relatively stable since tax year 2011 to 2012 though it was estimated at £2.2 billion in tax year 2017 to 2018 where it has remained in tax year 2018 to 2019.

Avoidance

VAT avoidance is another component of the VAT gap. Avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter, but not the spirit, of the law. VAT avoidance was estimated at £0.1 billion in tax year 2018 to 2019 (see Table 1.6).

VAT


Expenditure in the household sector

Each estimated household VAT-able expenditure component for tax year 2018 to 2019 is illustrated in Figure 2.2.

Recreation and culture, restaurants and hotels and transport are the largest elements of household consumption, which is consistent with estimates in previous years.

Household goods and services

Miscellaneous

Transport

Restaurants and hotels

Recreation and culture

9.1%

10.2%

18.3%

18.3%

18.8%

Figure 2.2: Composition of VAT-able expenditure for the household sector in 2018-191

Clothing and footwear8.9%

Food and drink

Alcohol and tobacco

3.3%

5.5%

Health2.1%

Housing

Communication

2.5%

2.9%

EducationNeg2

1 Numbers may not sum due to rounding.2 Neg denotes negligible: an estimate less than 0.05%.

VAT


Methodology and data issues

Methodology

The VAT gap is measured by comparing the net VAT total theoretical liability (VTTL) with actual VAT receipts (i.e. comparing the amount of VAT HMRC expects to receive in the UK and the VAT HMRC actually receives). The VAT gap methodology uses a ‘top-down’ approach which involves the following steps:

1. Assessing the total amount of expenditure in the UK economy Data is gathered detailing the total amount of expenditure in the economy that is subject to VAT, primarily from the Office for National Statistics (ONS). This is built up from five expenditure components: household consumption, capital expenditure on housing, government expenditure, non-profit institutions serving households’ expenditure and expenditure of businesses making exempt supplies.

2. Estimating the VAT liability on total expenditure The rate of VAT is applied (zero, reduced or standard rate) on that expenditure based on commodity breakdowns of the expenditure data to derive the gross VTTL.

3. Deducting any legitimate reductions Any legitimate reductions occurring through schemes and reliefs are deducted to calculate the net VTTL.

4. Subtracting actual VAT receipts Actual VAT receipts are subtracted from the net VTTL. The net VTTL for the calendar year is compared to VAT receipts for the corresponding financial year. This assumes a three-month lag between the economic activity and payment of the associated VAT to HMRC.

5. Calculating the VAT gap The residual element is calculated — the VAT gap — which is assumed to be the total VAT gap including fraud, debt and other losses.

Data

This publication includes both new data and updated data from the Office for National Statistics (ONS) National Accounts ‘Blue Book 2019’ and ‘Consumer Trends’ up to and including 2019 quarter four.

Due to the timing of the ‘Blue Book 2020’ publication, which will be published in autumn 2020 after the summer release of ‘Measuring tax gaps 2020 edition’, it has not been possible to take on data covering tax year 2018 to 2019 for the housing sector, the government sector and businesses making exempt supplies sector in the VAT gap estimate (around 30% of the VTTL). Therefore, for these sectors, the VTTL are forecast for 2018 to 2019 using the growth in nominal consumer spending and household investment income as provided by the Office for Budget Responsibility. The estimates will be updated once HMRC incorporates the new outturn data.

The VAT gap preliminary estimate for tax year 2019 to 2020 is expected to be published on the day of Autumn Budget 2020 and a second estimate is expected to be published alongside Spring Statement 2021. The exact release date will be available on the HMRC website www.gov.uk/government/statistics/announcements

VAT

http://www.gov.uk/government/statistics/announcements


VAT debt

Debt or non-payment is measured differently for indirect and direct taxes because we use different methods for estimating the tax gaps. For direct taxes we define ‘non-payment’ to be equal to debt written off (debts that are not collected). However, for VAT and other indirect taxes it is not appropriate to estimate ‘non-payment’ in this way. Because the VAT gap is calculated using a top-down approach, then ‘non-payment’ of VAT will already be included in VAT receipts. Hence VAT ‘debt’ is defined as new debts arising in the financial year less debt paid and debt adjustments. Debt adjustments refer to the difference between the amount initially declared by the trader and the finalised amount due.

The debt contribution to the VAT gap is estimated using HMRC operational data, with debt adjustments made to exclude MTIC debt and to reflect the deferral of payments under the ‘Time to Pay’ arrangements. Due to data availability issues, the debt contribution can only be measured from tax year 2007 to 2008.

This methodology does not relate to the stock of debt or debt written off. This means that estimates shown will differ from the VAT debt balance contained in HMRC’s Annual Report and Accounts.

Avoidance

The VAT avoidance tax gap is estimated using HMRC’s risk register data of avoidance schemes relating to VAT. See Chapter K of the ‘Methodological annex’ which accompanies this publication.


VAT



Revisions

Revisions have been made to the VAT gap estimates since last year’s publication ‘Measuring tax gaps 2019 edition’. This results in an increase in the level of the VAT gap for most years of up to around 1.9 percentage points or £2.1 billion (see Figure 2.3).

These revisions are a result of incorporating new and updated data from the Office for National Statistics (ONS) and updates to HMRC methodology to ensure the correct treatment of the data in the estimates. The main changes are as follows:

• taking on data from ‘Blue Book 2019’ (October 2019), the changes are outlined in a seriesof articles published by the ONS www.ons.gov.uk/economy/grossdomesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/2019– changes to data in the ‘Blue Book 2019’ were due to the ONS improving their data

sources and balancing processes which they use to derive a definitive Gross DomesticProduct (GDP) estimate from their three approaches to estimating GDP

– subsequent ONS expenditure/consumption data used to derive the VTTL has seenincreases and decreases (depending on the exact year)

– the new data increased the VAT gap between tax years 2005 to 2006 and 2016 to2017 by around 0.8 percentage points; in contrast, there was a slight decrease to theVAT gap in tax year 2017 to 2018 by around 0.1 percentage points

– these upward revisions seen between 2005 to 2006 and 2016 to 2017 are a resultof increases in the VAT due from increased ONS expenditure in the government andexempt sectors

– the downward revision seen in 2017 to 2018 was a result of decreases to the VAT duefrom the decreased ONS expenditure in the housing capital sector

• taking on data from ONS ‘Consumer Trends’ publications (up to and including quarterfour 2019), which are used to calculate the household sector– updating the VAT gap model with the ONS ‘Consumer Trends’ 2019 quarter two data

had the largest impact on the VAT gap estimates– this update led to an upward revision of 0.8 percentage points on average per annum,

reflecting increases in expenditure which in turn increased the VTTL– these updates were in line with the ‘Blue Book 2019’

• making required improvements to the VTTL model to incorporate new data andmethodological changes– this includes updating the way the VAT revenue lost due to the sales of smuggled

tobacco is estimated and improving the methodology for deducting expenditureon goods sold by small unregistered traders below the VAT threshold

– overall, these methodological improvements led to upward revisions of 0.3 percentagepoints on average per annum

– some of these updates resulted in upward revisions in earlier years comparedto downward revisions in more recent years

• taking on the latest forecasts from the Office for Budget Responsibility, which are usedto forecast parts of the VAT gap where data is unavailable

• the combined impact of all these changes can be further seen in Figure 2.3

VAT

http://www.ons.gov.uk/economy/grossdomesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/2019http://www.ons.gov.uk/economy/grossdomesticproductgdp/compendium/unitedkingdomnationalaccountsthebluebook/2019


2

4

6

8

10

12

14

16

0%

Figure 2.3: Revisions to the VAT gap estimates compared to the previous edition

2005 -06

2007 -08

2006 -07

2009 -10

2010 - 11

2012 -13

2011 -12

2008 -09

2013 -14

2016 -17

2017 -18

2014 -15

2015 -16

£0bn

2

4

6

8

10

12

14

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2018 -19

Measuring tax gaps 2019 £bn

Measuring tax gaps 2020 £bn

Measuring tax gaps 2019 %

Measuring tax gaps 2020 %

As part of the regular cycle of the VAT gap publications, HMRC continues to review the methodologies it uses to estimate the VAT gap to ensure these use best available data and assumptions, and are in line with current VAT policies.

Sensitivity of the VAT gap

The VAT gap estimates are often revised because of both new and updated data, as well as methodological improvements. Such revisions and variability occur because of the wealth of good independent data used and are positive reflections of this. As the data changes, so do the estimates. Because the VAT gap is derived from two very large numbers (the VTTL and the VAT receipts), any change to either of these numbers will have a large impact on the VAT gap estimates. It is for this reason that the trend in the time series is considered a better indicator of the VAT gap rather than its year-on-year changes.

VAT


Figure 2.4 shows how the VAT gap time series changed in each of the ‘Measuring tax gaps’ publications. Although the percentage VAT gap fluctuates, for example 2005 to 2006 varied from 15.4% to 12.2%, the trend is unchanged.

Figure 2.4 Revisions to the VAT gap as a percentage of liabilities compared to previous editions1

2005 -06

2007 -08

2006 -07

2009 -10

2010 -11

2012 -13

2011 -12

2008 -09

2013 -14

2016 -17

2017 -18

2014 -15

2015 -16

0%

2

4

6

8

10

12

14

16

18

2018 -19

MTG 2020

MTG 2019MTG 2018MTG 2017

MTG 2016MTG 2015

MTG 2014MTG 2013

MTG 2012MTG 2011

MTG 2010

MTG 2009

1 MTG stands for ‘Measuring tax gaps’.

Revisions policy for VAT gap estimates

HMRC only publishes a revised historical VAT gap series once a year in the ‘Measuring tax gaps’ publication, incorporating both new and updated data and methodological improvements together.

The preliminary and second estimate of the VAT gap will only include revisions for new data and required methodology improvements to ensure the correct treatment of the new data. For example, the estimates will be updated with the latest ‘Consumer Trends’ or ‘Blue Book’ data as published by the ONS.

VAT


3. Excise (including alcohol, tobacco and oils)

Other taxes5%

Corporation Tax14%

IT, NICs and CGT1

39%

Excise duties9%

Value Added Tax32%

£2.8bn

Tax gap by type of tax — value and share of tax gap, 2018 to 2019

£4.4bn

£12.1bn

£10.0bn

£1.7bn

1 IT, NICs and CGT refers to Income Tax, National Insurance contributions and Capital Gains Tax.

Key findings

The excise duty gap is estimated to be 5.0% of total theoretical liabilities (or £2.8 billion) in the tax year 2018 to 2019.

The overall tax gap on goods subject to excise duties is estimated to be £3.5 billion (£2.8 billion in excise duty and £0.7 billion in VAT). We call this the overall excise tax gap.

The overall excise tax gap is broken down into:

• £1.9 billion tobacco tax gap, with associated loss in tobacco duty (£1.5 billion) and VAT (£0.4 billion), including both cigarettes and hand-rolling tobacco

• £0.9 billion alcohol tax gap, with associated loss in alcohol duty (£0.6 billion) and VAT (£0.3 billion) including beer and spirits

• £140 million lost in Great Britain diesel duty and associated VAT

• £40 million lost in Northern Ireland diesel duty and associated VAT

• £520 million lost in other excise duties, which includes betting and gaming, cider and perry, spirits-based ready-to-drinks, and wine


2008 -09

2017 -18

2018 -19

Figure 3.1: Excise duty tax gaps as a percentage of theoretical liabilities by sector, 2007-08 to 2018-191

2007 -08

2009 -10

2010 -11

2012 -13

2011 -12

2013 -14

2016 -17

2014 -15

2015 -16

0%

5

10

15

20

Tobacco Other excise duties TotalHydrocarbon oilsAlcohol


The overall excise tax gap (duty and VAT combined) has fallen from £4.3 billion in tax year 2007 to 2008 to £3.5 billion in 2018 to 2019.

Figure 3.2: Excise tax gap (duty and VAT combined) by sector (£ million) 2007-08 to 2018-191

2007 -08

2009 -10

2010 -11

2012 -13

2011 -12

2008 -09

2013 -14

2016 -17

2017 -18

2014 -15

2015 -16

£m

1,000

2,000

3,000

4,000

5,000

2018 -19

Tobacco Alcohol Other excise duties

TotalGB diesel NI diesel


Excise


Alcohol

In the tax year 2018 to 2019, the alcohol duty gap that comprises beer and spirits is 7.5% of total theoretical liabilities. It has varied between 6.2% and 14.7% in the time series since tax year 2007 to 2008.

The alcohol tax gap is £900 million in 2018 to 2019, of which £600 million is in alcohol duties and a further £300 million in VAT.

Users of tax gap estimates should note that the methodology used for beer differs from that of spirits in two key areas:

• in estimating the upper and lower bounds of the gap

• in calculating an additional uplift factor for underreporting of consumption

Information on the different methodologies can be found in the ‘Methodological annex’.


Due to the uncertainty in the methodology used, the central estimates should be interpreted as an indicator of long-term trends, rather than as a precise estimate of year-on-year changes.

Figure 3.3: Alcohol tax gap (duty and VAT combined) (£ million) 2007-08 to 2018-191

2007 -08

2009 -10

2010 -11

2012 -13

2011 -12

2008 -09

2013 -14

2016 -17

2017 -18

2014 -15

2015 -16

£m

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2018 -19

Alcohol Spirits Beer


Excise



Beer

The beer illicit market share is estimated at 13% in the tax year 2018 to 2019. This results in estimated losses of £600 million in duty and a further £300 million in VAT, giving a total loss of £900 million.

The illicit market share for beer has varied between 9% and 16% in the time series since the tax year 2007 to 2008.

HMRC uses two different methods to estimate the beer tax gap. These methods produce an upper estimate and lower estimate. The true tax gap could be anywhere between these two estimates. The implied central estimate is intended to be an indicator of long-term trends.

The lower estimate has been stable at 2% this year.

The upper estimate has fluctuated between 12% and 24% between 2007 to 2008 and 2018 to 2019. In 2018 to 2019, the upper estimate of the beer tax gap is 23%.

Table 3.1: Beer: illicit market share and tax gap1,2,3

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Illicit market share

Upper estimate 8 % 22 % 24 % 19 % 20 % 17 % 23 %

Central estimate n/a 15 % 16 % 13 % 13 % 9 % 13 %

Lower estimate n/a 7 % 7 % 7 % 6 % 2 % 2 %

Tax gap (£ million)4,5

Upper estimate 400 1,400 1,650 1,200 1,350 1,100 1,700

Implied central estimate

n/a 900 1,000 800 850 600 900

of which VAT n/a 300 300 250 250 200 300

of which duty n/a 650 700 550 600 400 600

Lower estimate n/a 400 400 400 350 100 100

1 Lower and mid-point estimates are not available for years before 2007 to 2008.2 Percentage figures were independently rounded to the nearest 1%.3 Figures may not appear to sum due to rounding.4 The tax gap includes both duty and VAT.5 The pound tax gap figures were independently rounded to the nearest £50 million.


Excise



Spirits

The spirits illicit market share is estimated at 0.4% in the tax year 2018 to 2019. This resulted in an estimated loss of £10 million in duty and a further £10 million in VAT, giving a total loss of £20 million.

Due to the uncertainty in the underlying data inherent in the methodology, the central estimate should be interpreted as an indicator of long-term trends rather than a precise estimate of year-on-year changes.

Table 3.2: Spirits: illicit market share and tax gap1,2,3

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Illicit market share

Upper estimate 12% 13% 19% 12% 11% 12% 8%

Central estimate 7% 6% 11% 5% 3% 6% 0%

Lower estimate4 1% 0% 2% 0% 0% 0% 0%

Tax gap (£ million)5,6

Upper estimate 450 700 1090 660 680 770 530

Central estimate 240 270 600 270 170 360 20

of which VAT 80 100 220 100 70 140 10

of which duty 160 170 380 170 110 220 10

Lower estimate 20 0 120 0 0 0 0

1 Figures for previous years have been revised.2 Figures independently rounded to the nearest 1%.3 Figures may not appear to sum due to rounding.4 Negative numbers have been truncated at zero.5 The tax gap figures are independently rounded to the nearest £10 million.6 The tax gap figures contain both duty and VAT.


Wine

It has not been possible to estimate the illicit market share for wine due to the unavailability of a data source previously used to estimate the wine tax gap. We have now included wine within our illustrative tax gap estimate for ‘Other excise duties’.

More detail is given in the ‘Methodology and data issues’ section of this chapter.

Excise



Tobacco

In the tax year 2018 to 2019, the tobacco duty tax gap that comprises cigarettes and hand-rolling tobacco is 14.0% of total theoretical liabilities. It has varied between 12.8% and 21.7% in the time series since the tax year 2005 to 2006.

The tobacco tax gap is estimated to be £1.9 billion in 2018 to 2019. An estimated total of £1.5 billion has been lost in tobacco duties and a further £0.4 billion in VAT.

The cigarette tax gap is estimated to be £0.9 billion and the hand-rolling tobacco tax gap is estimated to be £1.0 billion in 2018 to 2019.

Due to the uncertainty in the underlying data inherent in the methodology, the central estimate should be interpreted as an indicator of long-term trends rather than a precise estimate of year-on-year changes.

Results for 2018 to 2019 are projected based on the tax year 2017 to 2018 tobacco tax gap percent. Our model that produces this estimate uses the Office for National Statistics ‘Opinions and Lifestyle’ survey to estimate total consumption. There is a break in the consistency of the data as both the mode of sampling, and questions about consumption have changed. For this reason, further development is required on the 2018 to 2019 estimate to understand the implications to our modelling. For more details on changes to the survey, see the ‘Methodological annex’.

The combined tobacco tax gap is the sum of the central estimates for cigarettes and hand-rolling tobacco. It is not possible to combine both upper (or equivalently, lower) estimates, so there is no upper or lower bound estimate for the combined tobacco tax gap. More detail on upper and lower bounds is given in the ‘Methodology and data issues’ section of this chapter and in the ‘Methodological annex’.


Excise



Table 3.3: Tobacco tax gap (£ million)1,2,3,4

2005-06 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

Cigarette illicit market5

Upper estimate 2,400 2,000 1,500 2,200 2,300 1,300 1,300

Central estimate 1,900 1,400 900 1,600 1,800 900 900

of which VAT 300 300 200 300 400 200 200

of which duty 1,500 1,100 700 1,300 1,400 700 700

Lower estimate 1,400 800 400 1,000 1,200 500 500

Hand-rolling tobacco illicit market

Upper estimate 1,000 1,200 1,000 1,000

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